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Dynamic Pricing: DVD versus CD Strategies

I'm working on a longer research note on DVDs and CDs, but this excerpt suddenly became relevant, in light of a few WSJ and NYT articles yesterday.

Here's an early look at (hopefully) next week's release:

D R A F T

"It may be instructive to look at the pricing model of DVDs for insight into what has happened in the CD market. In case you were unaware, the film/TV industry uses a very different pricing strategy than the music biz.

Studios release far less product each year then the labels, with major film releases numbering in the 100s versus 25,000 or so annual CD releases.

Films have a model where they typically are released from the highest revenue generator down to the lowest. Another way to describe that progression is a dynamic pricing structure going from highest paying users to lowest.  Starting with theatrical release (movie theatres), moving next to pay-per-view, and than premium cable (i.e, HBO). After the premium cable run has begun (or ends) is when typically DVDs get released for sale (or rental) to the public. Eventually, movies make their way to basic cable, and lastly, to broadcast TV. (Somewhere in the middle is overseas release, but for our purposes, that's more of a parallel track).

DVD sales do not rely on a static pricing model. They are initially released at a price point consistent with expected demand. After a short period of time, prices drop, and in some cases, significantly.

A few recent film and TV examples may be instructive. The Seinfeld Collection (Seasons 1&2, and Seasons 3&4) were originally released before Thanksgiving (November 29, 2004), and sold for $49.99 at retail. As the Christmas holidays approached, prices were no less than the $44.99 level. Shortly after the holidays, sales as low as $39.99 were seen. Towards the end of March, Amazon (AMZN), Target (TGT) and Circuit City (CC) all advertising both sets for $29.95 a piece.

Pricing is a combination of popularity (demand) and age (supply). The older a release is, the more its available on the secondary markets. Let’s look at a few recent animated films: Older movies, such as Shrek, Ice Age and Antz are all $10 today. More recent films, such as Finding Nemo or Shrek2 are $14.99 and $15.99 respectively. Films fresh out of the theatres, such as The Incredibles, are $20.

Traditional films (live action) are priced similarly. Older releases such as School of Rock, Titanic, or Forest Gump are $7.50. We see more recent features such as Kill Bill  1(and Kill Bill 2), Lord of the Rings, Bourne Identity, Gladiator, and Master & Commander sold for $10.

But its not  just a function of age:  Certain older titles never seem to drop below $10 -- recently films of acclaim like Pulp Fiction, or Saving Private Ryan, or older classics like Ben Hur or Ten Commandments -- despite their age. Its a function of popularity and hence, demand.

Ironically, many of the films mentiooned here now sell for less than their soundtracks. Two hours (or longer) of a movie, plus additional audio commentary, a documentary of the making of the film, outtakes, special features etc., all cost less than a mere 45 minute audio only songs from the film.

We've stated this before, but it bears repeating: Consumers have very quickly figured out that CDs are a peculiarly weak value propostion. Is it any surpise that CD sales have slid while DVDs have grown explosively? How is it that the widespread availability of films on Bit Torrent haven’t dented their sales? A simple possible explanation is pricing structure.

By pricing DVDs strategically, the film and television industry captures marginal sales and maximizes revenue. The only comparable pricing structure in the music industry are budget CDs. These are typically much older than the DVD price discounts (6 months versus many years). Even worse, they are packaged differently, specifically marketed as “budgetline” -- with less desirable cover art and labelling. (There’s nothing quite like sending a message to your price sensitive clients that you are 2nd rate consumers, and we hardly value your business). 

Compare the differening approaches the two industries take. DVD sales are dynamically priced. Sellers are aware they have price sensitive consumers. They offer the exact same product -- albeit on a less timely basis.

CD sales are static, maintaining the same price over the life of a disc. On those select discs when price discounts do occur (budget line), the industry purposefully makes changes to make the product less desirable.

DVD sales in the secondary market have grown dramatically, paralleling the explosive growth of DVDs themselves. But the ongoing discounting process continues, with prices sliding as low as $5 per DVD. This dramatically reduces the impact of the secondary market.

More on this, and an some interesting conclusions via our study of secondary markets, next week.

>

Other Sources:
An Ever-Shorter Leap From Theater to DVD
By Jen Chaney
The Washington Post, Sunday, March 13, 2005; Page N03
http://www.washingtonpost.com/wp-dyn/articles/A26877-2005Mar11.html

For Those of You Who Wonder How That TV Show Began
By DAVID KOEPPEL
NYT: March 21, 2005
http://www.nytimes.com/2005/03/21/business/media/21dvd.html

What's on the Flip Side Of That CD? Increasingly, a DVD
Ethan Smith
The Wall Street Journal, March 21, 2005; Page B1
http://online.wsj.com/article/0,,SB111135876878284547,00.html

The Music Goes on Side A and the Flip Side Is a DVD
By ROBERT LEVINE
NYT: March 21, 2005
http://www.nytimes.com/2005/03/21/business/media/21dual.html

Tuesday, March 22, 2005 | 06:50 AM | Permalink | Comments (39) | TrackBack (7)
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Comments

One quick comment - new releases, such as The Incredibles and Shrek, tend to sell at a lower price $15-17 when they come out first. I've noticed that they sell it at that price at Walmart, Target, etc. for a couple of weeks and then the price goes up to about $18-19. I've also seen a research report indicating this but I can't remember where.

Posted by: roto | Mar 22, 2005 9:02:44 AM